OTP Group: 2016 Q2 results

The banking group results exceed analysts’ expectations.

Similar to previous periods OTP Group maintained a strong and safe liquidity position, with significant profit improvement.

The consolidated accounting profit was HUF 71.9 billion in 2Q, more than double reached in the previous quarter as a result the half year accounting profit increased to HUF 106.2 billion (+165% y-o-y).

In 1H 2016 OTP Group posted HUF 104.1 billion adjusted after tax profit which is materially higher than the net earnings realized in the base period (HUF 69 billion). The y-o-y 51% increase is almost entirely explained by the significantly improving Russian and Ukrainian performances; the semi-annual profit of the CEE Group members was quite similar as in the base period.

The FX-adjusted consolidated loan portfolio stagnated q-o-q (-3% y-o-y). In 2Q 2016 retail volumes remained stable with unchanged consumer book and the mortgage portfolio marginally eroding (-1%). The SME volumes, however, increased by 4%. Large corporate volumes grew by 1% q-o-q (+6% y-o-y). As for individual performances SME volumes at OTP Core surged by 6% q-o-q, whereas the Bulgarian large corporate exposures grew by 9% and the Croatian mortgage book increased by 4% q-o-q.

There was an improvement in the quality of the credit portfolio, the development of the DPD90+ volumes was quite representative. As a result of the improving macroeconomic environment, but also due to FX household loans’ conversion and the portfolio clean-up at the Russian and Ukrainian subsidiaries in 2015, DPD90+ loan volume growth adjusted for FX rate movements and the effect of loan sales and write-offs amounted only to HUF 7.7 billion in 2Q. In absolute terms the biggest inflow was registered still in Russia, but the trend is declining (in HUF billion, 1Q: 17, 2Q: 12.7). At the same time the portfolio quality did not deteriorate in Hungary and Bulgaria, there was even a healing process and previously non-performing portfolio elements were taken out of the DPD90+ category. The consolidated DPD90+ ratio declined to 16.4% (-0.6 ppts q-o-q), its coverage increased to 95%.

2Q Group level risk cost rate dropped to 0.87%, as a result the 1H risk cost rate stood at 1.09% versus 3.15% a year ago.

The FX-adjusted deposit volumes declined by 1% q-o-q, but grew by 5% y-o-y. Out of the major Group members deposit volumes at OTP Core eroded by 3% q-o-q, whereas the Romanian, Bulgarian, and Ukrainian portfolios increased by 4% each.

The consolidated net loan-to-(deposit+retail bonds) ratio reached 68% underpinning a moderate increase q-o-q being in line with the management’s aspirations.

The adjusted after tax profit of OTP Core (basic activity in Hungary) reached HUF 30.7 billion in 2Q 2016, underpinning a 6% q-o-q improvement and a 3% y-o-y increase. As a result the semi-annual adjusted profit reached HUF 59.6 billion (+1% y-o-y). 2Q profit before tax grew by 4% q-o-q. The operating profit without one-off revenue items dropped by 19% reasoned by q-o-q 2% lower total income, but rather by a 13% surge in operating expenses.

As for the foreign subsidiaries’ performance: stable Bulgarian, improving Russian, Ukrainian, Romanian and Croatian net earnings are posted.

On the back of the improving Ukrainian and Russian performances there was a realignment of individual profit contributions within 2Q consolidated adjusted profit after tax: OTP Core and DSK Bank have maintained their dominant positions with HUF 30.7 billion and HUF 14.2 billion adjusted net profit contributions, respectively, however the Russian and Ukrainian subsidiaries are becoming more and more substantial (HUF 6.5 billion and HUF 3.4 billion, respectively). Other CEE subsidiaries posted HUF 2.5 billion in total; only the Slovakian bank remained in red (-HUF 55 million). Touch Bank was still a loss maker (-HUF 1.5 billion).

Without significant maturities in 1H 2016 the total liquidity reserves of OTP Bank remained steadily and substantially above the safety level. As of 30 June 2016 the gross liquidity buffer was above EUR 7 billion equivalent (the operative liquidity buffer above EUR 6.8 billion equivalent).

By the end of June 2016 the consolidated Common Equity Tier1 ratio under IFRS was 13.2%, did not change q-o-q. OTP Bank’s stand-alone Common Equity Tier1 ratio stood at 25.6% in 2Q 2016 underpinning a y-o-y 1.3 ppts increase.